14th August 2017

Leaving. And you are starting your own business?

My IFA business had two advisers leave to set up their own businesses a number of years ago. It was not a good experience for me as their expectations around client ownership did not quite mirror mine or their contract. This great observation by Peter Singfiled at Foot Anstey on how to avoid legal conflict when an adviser leaves your firm is well worth a read.

“As one descends inexorably towards middle age, nothing seems to hit that sweet spot of irritation more than the modern propensity to make up words. 

One example of this came when Hollywood actress Gwyneth Paltrow and Coldplay frontman Chris Martin announced they were “consciously uncoupling”. Whatever happened to a good old-fashioned break-up?

But despite the pretentious phrasing, advisers and their firms would do well to follow this positive approach to ending a relationship. That people move around, for different reasons, is a fact of business life. It need not be a cause of as much strife as we regularly see. 

As a firm losing an adviser, you will have invested in them, backed them and allowed them to use your resources. You will want some reasonable expectation it will reap the benefits of revenue growth in return for that investment and be able to protect its confidential information and intellectual property.

For that reason standard agreements will include:

• Ongoing obligations of confidentiality
• Recognition of ownership of intellectual property
• Post-termination restrictions, prohibiting poaching (“solicitation”) of clients (or staff or suppliers) and doing business (“dealing”) with customers for a restricted period.

As an adviser looking to move, the reality will often be you have long-standing personal relationships with clients. These can stretch back years and span life- changing events. Some advisers may think “why on earth should I give up these relationships?” Others will not have read the agreement for a long time and spare no thought to the covenants at all.

Parties in conflict 

The firm the adviser is moving to is making its own investment. It brings people in, by and large, with the expectation they will both have, and be able to grow, a client following. This, in turn, drives the firm’s financial performance.Each of the competing interests here is understandable and legitimate.  Unfortunately, the pattern we see repeating itself over and over again is one in which all three parties come into conflict. 

We see advisers taking confidential information (the classic examples being emailing materials from work to personal addresses or accessing and printing databases) and using it to try to convince clients to follow them and/or breaching non-solicitation obligations during the period of restriction.

Understandably, the old firm is aggrieved and, at the very least, sends pre-action correspondence through lawyers asking for under-takings that the covenants will be complied with. The matter spirals into an ongoing legal dispute, with parties arguing about whether covenants are enforceable. 

The new firm gets dragged into the matter as the old firm wants to know what it knew about the alleged breaches of covenants and whether it received, and has used, confidential information. More often than not, some form of compromise is reached, with undertakings not to use the material being offered. However, this is not before all parties have incurred legal costs.

Even where the old firm wins such action, they often have costs they cannot recover from the other side and client relationships that have gone and are not coming back.

What is frustrating about those situations is that they are often avoidable. The reality may have been that the adviser moving would have brought x per cent of their clients with them by virtue of personal relationships. Rather than fly under the radar, all parties could have sought to have a frank conversation around that upfront.

Even if they could not agree anything, everyone could proceed in a manner compliant with their contractual obligations, and all three parties could still get at least part of what they want from the situation: 

• Some clients will inevitably follow the adviser, who can compete once free of restriction
• The new firm can take on those clients and help the adviser comply with his or her covenants
• The old firm gets the protection they are entitled to as obligations are complied with, and has the chance to introduce new advisers to the clients
• No one spends thousands of pounds on legal costs. 

Clearly, there will be situations where disputes are unavoidable or lines are crossed. But maybe Gwyneth was on to something: maybe we could all benefit from a little more conscious uncoupling and a little less breaking up”.

Peter Singfield is partner at Foot Anstey LLP and this excellent article first appeared in Money Marketing earlier this year

As a footnote, excuse the pun, neither of those advisers businesses lasted and to the best of my knowledge, they are no longer IFAs.

Business Development